Kaufman and Hays, Circuit Judges, and Ryan, District Judge.*fn* Ryan, District Judge (dissenting).
IRVING R. KAUFMAN, Circuit Judge:
The bankrupt, Louis C. Ostrer, appeals from a judgment of the District Court for the Eastern District of New York, reversing an order of the Referee discharging the bankrupt because the Referee misapplied the proper test for what constitutes a "materially false statement" of financial condition within the meaning of § 14c.(3) of the Bankruptcy Act, 11 U.S.C. § 32(c) (3).
The bankrupt was engaged in the business of selling life insurance as a broker in his own name and as a general agent under the name of Louis C. Ostrer Associates, Inc. He was an executive and sole stockholder of this corporation as well as of Citizens Factors Corporation, a money lending business. During the period from November 16, 1960 to February 8, 1962 the bankrupt obtained from Meadow Brook National Bank, the objector in these proceedings, moneys aggregating in excess of $350,000 for the use of his insurance and money lending enterprises.
On May 8, 1961 the bankrupt signed a personal balance sheet (financial statement) for the period ending May 1, 1961 prepared by Ben Wolf, a Certified Public Accountant, and delivered it to the Bank as he was requested to do. The statement recited that it was an unaudited statement and appears upon its face to have been an approximation or estimate rather than an exact statement of assets, liabilities and net worth.
On November 20, 1964 appellant filed a voluntary petition in bankruptcy in the Eastern District of New York and on the same day was duly adjudicated bankrupt. Subsequently, specifications of objections to a discharge in bankruptcy were filed by the creditor Meadow Brook alleging that appellant, while engaged in business as a sole proprietor and as an executive of a corporation, obtained moneys and an extension and renewal of credit by issuing a materially false statement in writing respecting his financial condition, allegations which, if proved, would bar appellant from a discharge under § 14c.(3) of the Bankruptcy Act.
The statement of financial condition submitted by the bankrupt to the Bank was deficient in several particulars: It failed to list a contingent liability of $90,000 due to objector, which arose from an endorsement by the bankrupt of third-party paper, payable to the bankrupt and discounted by Meadow Brook, and also failed to list the third-party paper as an asset. In addition, it failed to include other assets in the amount of $259,933.93 comprised of corporate shares held in the bankrupt's name or for his account, together with the proceeds of recent sales of stock. There was also evidence that figures used for personal renewal commissions were computed at a projected rate which in many instances was less than actually prevailed under the applicable insurance contracts.
On the other hand, the statement erroneously included the sum of $90,300, representing the value of a residence in Great Neck, New York, which was owned by Ostrer's wife, as well as a deferred asset of $150,000 in renewal commissions which were due to his wholly owned corporation and not to the bankrupt. Moreover, it listed as an asset the combined value of three automobiles, one of which was registered in the name of his wife, although no exact value was assigned to the wife's car. Also included was a burglary claim against an insurance company, discounted at $20,000, which covered some items of property belonging to the bankrupt's wife. The actual claim, the Referee found, was for $27,500 and was settled for $9,500 sometime after May 1, 1961. Due to a confusion of names, the statement showed bankrupt as owning 1,000 shares of Citizens Life Insurance Company when, in fact, he owned only 550 such shares, and as being the owner of 250 shares of Citadel Life Insurance Company when, in fact, he owned 750 shares of such stock. The combined value of the shares of stock in these companies which he did own was equal to the combined value of the shares of these companies which he listed as being owned by him.
The Referee after a hearing found as a fact that none of the financial statement's inclusions or exclusions indicated an intention by Ostrer to deceive or defraud the Bank. He concluded that the statement was not made for the purpose or with the intention of deceiving or defrauding the objecting creditor and that the statement was not knowingly and intentionally untrue or false within the meaning of § 14 of the Bankruptcy Act. The Referee laid particular stress on the fact that, in any event, the bankrupt's actual net worth, after subtracting $240,000 (the combined amount of the value of the residence and the renewal commissions due to the corporation and erroneously included in the statement), exceeded by approximately $20,000 the net worth reflected in the statement. Not only were the assets erroneously included more than balanced by the omitted other assets, but the bankrupt appears to have significantly undervalued some of the assets included, notably the value of the personal renewal commissions. Moreover, Ostrer carefully segregated the value of his personal renewal commissions from the value of the corporate renewal commissions and made no attempt to conceal the fact that the latter were included in the statement. Nor did he attempt to double-count or inflate his assets by placing any value on his interest as sole shareholder in the corporation beyond the value of the corporate renewal commissions.
Recognizing that the Bank had made out a prima facie case under § 14c.(3), the Referee concluded that the bankrupt had carried his burden of proof in defense by negating any intention on his part to deceive or defraud the bank.*fn1
The District Judge found it unnecessary to review the Referee's findings of fact, having concluded that the Referee erred as a matter of law in his interpretation of the requirements of § 14c.(3). Where, as here, it is conceded that the bankrupt had actual knowledge that the statement was incorrect, that knowledge, the Court held, is sufficient to constitute a "materially false" statement of financial condition within the meaning of § 14. The District Court found it of no moment and legally irrelevant that there was no intent to deceive the Bank and that the bankrupt's actual net worth exceeded that shown on the statement. We conclude that the District Court's decision is out of harmony with the prevailing rationale of the Bankruptcy Act and with the generally accepted interpretation of § 14c.(3).
The provisions of the Bankruptcy Act created the broad discharge medicament for the financially sick debtor. It was designed by Congress to give that debtor, hopelessly mired in debt, an opportunity for a fresh start. Local Loan Co. v. Hunt, 292 U.S. 234, 244, 54 S. Ct. 695, 78 L. Ed. 1230 (1933). The denial of a discharge under § 14c.(3) of the Act is a most punitive measure directed against bankrupts who have obtained credit on the basis of intentionally false statements. See, e.g., In re Lovich, 117 F.2d 612, 614 (2d Cir. 1941); In re Rosenfeld, 262 F. 876 (2d Cir. 1919). We noted in In re Tabibian, 289 F.2d 793, 795 (1961):
In weighing the facts put forward in a contest over a discharge * * * a court should keep in mind the beneficial policy allowing the honest debtor to get a new start in business and life -- and should construe § 14 strictly ...